Taxpayers Hit Twice by Fast-Food Pay Practices: Report

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When McDonald’s (NYSE: MCD) becomes the first of the major publicly traded restaurant chains to deliver up its first-quarter earnings Tuesday morning, investors hope that it will give the sector a boost.

Some healthy revenue gains and on-target profit numbers might keep McDonald’s shareholders happy and buoy investor confidence in the economy more broadly, but it would provide one group with a lot more ammunition to lob at the restaurant industry.

In a scathing analysis, the progressive Institute for Policy Studies has calculated that a law allowing corporations to deduct executives’ stock options and other so-called “performance pay” from their income taxes, without limits, costs taxpayers some $232 million in the last two years — based on just 20 large companies in the restaurant industry.

At the same time, the new report notes, large restaurant chains often pay their low-level workers "so little that many of them must rely on Medicaid and other taxpayer-funded anti-poverty programs." The Institute for Policy Studies says the 20 companies in its report are all members of the National Restaurant Association, which is fighting efforts to raise the minimum wage.

What the Institute for Policy Studies calls a “loophole” actually stems from changes to the tax code dating back to 1993. Congress, seeking to rein in executive pay, capped tax deductibility of cash payments at $1 million — but allowed for unlimited deductions for performance-based pay. That's opened the door to the explosion in use of stock option grants as the main source of executive compensation in the 1990s.

At McDonald’s, the tax benefit was a relatively modest $12 million over the last two years, in large part because new CEO Donald Thompson decided against exercising most of his “in the money” stock options. Starbucks and CEO Howard Schultz benefited far more, though. Chairman and CEO Howard Schultz received $236 million in exercised stock options and other kinds of performance pay in the two-year period that the Institute for Policy Studies surveyed. That enabled Starbucks to cut its IRS bill by $82 million — "enough to raise the pay for 30,507 baristas to $10.10 per hour for a year of full-time work," the report says.

At the other end of the wage spectrum are the Starbucks baristas, who earn an average of about $8.80 an hour (or, if they are a shift supervisor, just north of $11 an hour). No one (except maybe a few baristas) is suggesting low-level Starbucks employees should be walking away with millions a year. They’re not the people responsible for devising new drinks, designing new store layouts, negotiating real estate contracts or haggling over coffee supply deals — much less overseeing it all. And yet if you’re trying to support a family of two on those earnings, you’ve officially fallen below the poverty level. (In practical terms, trying to live off that in cities like New York, San Francisco, Boston or Miami won’t get you very far solo, either.)

At Taco Bell, KFC and Pizza Hut, many workers collect less than $8 an hour on average, and the National Employment Law Project calculates they cost taxpayers $648 million a year in public assistance as a result. Yum Brands (NYSE: YUM) CEO David Novak earned $67 million in performance pay in 2012 and 2013. (During that two-year period, Yum’s stock rose 12.6 percent, lagging the S&P 500 index by more than 13 full percentage points.) That resulted in Yum being able to write off $23 million against its taxes.

Incidentally, the three companies that the Institute for Policy Studies identifies as taking a softer line publicly on the minimum wage debate (leaving the tough talk to the National Restaurant Association) are those whose stock prices have beaten the S&P 500 over the two-year period in question: Starbucks, Dunkin’ Brands (NASDAQ: DNKN) and Chipotle Mexican Grill (NYSE: CMG). Outspoken opponents, like McDonald’s and Darden Restaurants (NYSE: DRI), underperformed the market.

If data were going to alter the stance taken by the fast-food chains and the restaurant trade group, it would likely already have done so. They are focused on their duty to generate profits for shareholders, not on whether or not they have an obligation to pay what someone else deems to be a living wage. They can argue that as long as there are workers who will compete for jobs at a certain wage, it must, by definition, be a living wage.

Leaving the merits of that debate to one side, this new set of data will add some new fuel onto the fire by pointing out that the taxpayer burden isn’t just a direct one — the cost of providing food stamps, say, to fast food workers who can’t even afford to dine on the cheap food they’re serving up. There’s an indirect cost, too.

It’s tough to imagine the government retroactively insisting that a company use the corporate tax breaks of a 21-year-old policy to boost employee pay. On the other hand, it’s not all that hard to imagine this data adding to efforts, both at the national and state levels, to boost minimum wages. It may even contribute to increased scrutiny of executive compensation — and to how much “performance” those tax-deductible pay packages were really rewarding.

At the end of the day, all the hullabaloo about the minimum wage is less about absolute wages than it is about the wealth gap. Is a CEO today worth 273 times the salary of an average worker?

In the meantime, taxpayers in the middle are asked to foot the bill at both ends, subsidizing corporate tax breaks to underwrite lavish compensation packages for CEOs while at the same time paying for public assistance programs that make it possible for a segment of that CEO’s workforce to house, clothe and feed themselves and their families.

Given the public policy questions that arise from that situation, businesses need to start addressing the disparity…or they’ll find government does it for them in a way they’ll like even less.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.